Rauner pension fix could backfire, experts warn

State Sen. Daniel Biss, D-Evanston, said he would seek votes on resolutions declaring it “irresponsible” to back Rauner’s pension proposal without first assessing its long term implications.

State Sen. Daniel Biss, D-Evanston, said he would seek votes on resolutions declaring it “irresponsible” to back Rauner’s pension proposal without first assessing its long term implications. (Nancy Stone, Chicago Tribune)

Gov. Bruce Rauner's pension fix could lead to problems down the road, experts say

Richard Ingram, head of the Illinois Teachers' Retirement System, likens efforts to fix Illinois' worst-in-the-nation pension mess to a game of whack-a-mole.

"You hit something somewhere and something else pops up," said Ingram, executive director of the state's largest government retirement fund, which represents nearly 400,000 active and retired teachers from suburban and Downstate districts.

Case in point, a landmark 2010 law cutting the cost of pensions offered to newly hired state workers and teachers, one that TRS experts fear could begin to backfire in little over a decade. Despite those concerns, Republican Gov. Bruce Rauner has made that law the backbone of his new attempt to save the state money by reducing pension benefits for a much larger pool of veteran employees.

The teacher pension fund's financial analysts warn the reductions for new hires were so steep that by 2027 retirement benefits for some workers will begin to fall below minimum federal standards, exposing taxpayers and employees alike to expensive repercussions.

What's more, those experts say those reforms appear to upend the notion of a retirement nest egg, requiring workers hired in the last five years to contribute more into the pension system over their careers than the projected value of benefits they could one day reap.

"It's like a tax that some of us are paying that nobody else is," complained Ingram, himself one of those recent hires referred to in Illinois pension speak as Tier 2 employees.

On Tuesday, Democratic legislative pension experts seized on questions about the Tier 2 benefits as part of an effort to serve notice to Rauner that his sweeping pension overhaul was likely dead on arrival in the Democratic-controlled legislature. Rejection of such cuts by lawmakers would blow a $2.2 billion hole in the new governor's first budget.

Gov. Bruce Rauner, who has been barnstorming the state to promote his message that Illinois government is corrupt and in need of "structural reform," took aim Tuesday at the Illinois Supreme Court, saying he doesn't trust its justices.

The Republican governor has often criticized the state's system...

Gov. Bruce Rauner, who has been barnstorming the state to promote his message that Illinois government is corrupt and in need of "structural reform," took aim Tuesday at the Illinois Supreme Court, saying he doesn't trust its justices.

The Republican governor has often criticized the state's system...

(Kim Geiger)

State Sen. Daniel Biss, D-Evanston, and Rep. Elaine Nekritz, D-Northbrook, said they would seek votes in their respective chambers on resolutions declaring it "irresponsible" to back Rauner's proposal without first assessing its long term implications.

"The road to pension hell is paved with rash actions," said Biss, who noted that today's pension problems could have been averted if policymakers long ago had paid closer attention to the impact of funding and benefit decisions years down the road.

Rauner aides declined to make policy experts available to answer questions about the potential for problems with Tier 2 benefits. In an email, a Rauner spokesman pointed to a November letter from an official of the Internal Revenue Service stating that a state pension system covering university employees was currently in compliance with federal law. But the spokesman did not directly respond to questions about what could happen in the future.

"In summary, the creation of Tier 2 for newly hired employees occurred on Jan. 1, 2011. . . in the four full years since the plan has been implemented all of the systems have maintained qualified plan status," Rauner spokesman Lance Trover wrote in the email.

At issue is a difficult debate in Illinois over how to pay down a massive pension debt, now standing at nearly $105 billion, the product of decades of politically expedient decisions in Springfield to divert money due pension funds to more voter-pleasing causes. The shortfall has badly damaged the state's credit rating, and pension costs are consuming an ever-larger share of tax revenue.

The battle over Tier 2 is separate from a different, broad-based pension reduction plan signed into law in 2013 by then-Gov. Pat Quinn. The Illinois Supreme Court is mulling the constitutionality of that reform package after hearing oral arguments last month. Critics contend the law violates guarantees in the Illinois Constitution that public pensions not be "diminished or impaired."

Rauner ripped Quinn's solution, pushing an alternative vision of pension reform that evolved as the campaign progressed last year. Then, after the election, Rauner said it would be prudent to wait on new pension actions until the state Supreme Court set "ground rules" on what "probably works and won't work."

Once in office, however, Rauner did not wait for guidance from the court. His budget for the next fiscal year anticipates significant savings from extending the scope of the less generous — and less expensive — Tier 2 benefit structure.

Under Rauner's proposal, veteran employees would be allowed to keep all retirement benefits they have earned up to the end of June. After that, everyone would be moved into the Tier 2 plan, with the exception of workers who opt to transfer their retirement benefits into a 401k-style retirement account similar to those now common in private industry.

Jean-Pierre Aubry, an expert on public pension plans at Boston College, termed the benefit cuts of Tier 2 "pretty draconian," opening the door to future problems he said would be without precedent in the U.S. "There's a lot of things in Illinois that are different from the rest of the country," said Aubry, assistant director of state and local research at the college's Center for Retirement Research.

Central to questions about Tier 2 is a federal tax provision sometimes referred to as the Safe Harbor rule. In short, it requires public pension plans to offer retirement benefits at least as good as the minimum workers would get if they were covered by Social Security.

Failing that, federal law requires public workers to join Social Security and pay a 6.2 percent tax to the national retirement system. Their employers would also have to kick in another 6.2 percent, costing taxpayers more money. Most public employees and employers in Illinois currently do not pay Social Security taxes.

Teacher retirement system experts say Tier 2 benefits currently meet the Safe Harbor test but will begin to fall out of compliance by 2027. The reason, they say, is that Tier 2 includes both a limit on benefits and inflation adjustments much tighter than those adopted by Social Security — leaving retirement benefits for some workers at risk of falling below what they could qualify for under the federal system.

A fix for the problem would be to increase cost-of-living adjustments for Tier 2 workers to keep them in line with what Social Security offers. That, however, would cut into the cost savings counted on by Rauner and state leaders who approved the 2010 law.

Larry Langer, a principle at Buck Consultants which conducted the actuarial analysis for TRS, predicted only higher-paid employees would initially bump up against the Safe Harbor threshold. If Tier 2 were confined to newer hires — who tend to earn less — Langer predicted the ranks of affected workers would be modest for many years beyond 2027.

That dynamic would change, however, if tens of thousands of additional workers are put into the Tier 2 retirement system as Rauner proposes, Langer said. "These are people who are higher paid just because of where they are at in their career and higher pay is a potential driver of non-compliance," Langer explained.

At present, no limit applies to the pensions that can be earned by veteran workers, who also can retire at a much earlier age than new hires and still qualify for full benefits. Even so, all workers, new and old, are required to make payroll deductions to support their pensions at the same rate.

That, the analysts say, leads to another disparity: Tier 2 workers' benefits cost about 7 percent of their pay, but they contribute 9.4 percent toward their retirement. Veteran workers, on the other hand, also contribute 9.4 percent of their pay, but their benefits tend to cost more than 14 percent, teachers r

etirement fund analysts said.

"Right now, a Tier 2 member pays for more than the cost of their benefit," Ingram said. "We're subsidizing the state's pay down of the unfunded liability."